Micro Exam

Refer to Figure 14-4. When market price is P5, a profit-maximizing firm's profits can be represented by the area

(P5-P4) x Q3

Comparison of marginal revenue to marginal cost

(i) and (ii) only

fall

If the demand curve for computer games shifts to the left, then the value of the marginal product of labor for computer game authors will

Which of the following statements best reflects a price-taking firm?

If the firm were to change more than its going price, it would sell none of its goods

Refer to Figure 14-1. When price rises from P2 to P3, the firm finds that

expanding output to Q4 would leave the firm with losses

In a competitive market, the actions of any single buyer or seller will

have a negligible impact on the market price

make hire

if VMPL> or = W,

Refer to Scenario 14-2. At Q = 1,000, the firm's profit amounts to

$1000

Refer to Scenario 14-2 and the answer in question 24. At Q = 999, the firm's profit amounts to

$1003

Refer to Scenario 14-2. At Q = 999, the firm's total cost amounts to

$10985

Consider a firm operating in a competitive market. The firm is producing 40 units of output, has an average cost of production equal to $5, and is earning $240 economic profit in the short run. What is the current market price?

$11

Refer to Table 14-4. What is the marginal cost of the 8th unit?

$120

Suppose that a firm is currently maximizing its short-run profit at an output of 50 units. If the current price is $9, the marginal cost of the 50th unit is $9, and the average cost of producing 50 units is $4, what is the firm's profit?

$250

Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8.00. What would be the firm's total revenue if it instead produced and sold 4 units of output?

$32

Refer to Table 14-4. What is the total revenue from selling 4 units?

$320

Refer to Table 14-4. What is the total revenue from selling 7 units?

$560

Refer to Table 14-3. At which quantity of output is marginal revenue equal to marginal cost?

$6

Refer to Table 14-4. What is the marginal cost of the 5th unit?

$68

Refer to Table 14-4. What is the average revenue when 4 units are sold?

$80

Refer to Table 14-4. What is the marginal revenue from selling the 1st unit?

$80

Refer to Table 14-4. What is the marginal revenue from selling the 5th unit?

$80

To sum up, two characteristics describe the long-run equilibrium in a monopolistically competitive market:

- As in a monopoly market, price exceeds marginal cost. This conclusion arises because profit maximization requires marginal revenue to equal marginal cost and because the downward-sloping demand curve makes marginal revenue less than the price. - As in a competitive market, price equals average total cost. This conclusion arises because free entry and exit drive economic profit to zero. The second characteristic shows how monopolistic competition differs from monopoly. Because a monopoly is the sole seller of a product without close substitutes, it can earn positive economic profit, even in the long run. By contrast, because there is free entry into a monopolistically competitive market, the economic profit of a firm in this type of market is driven to zero.

Long-run Equilibrium

- When firms are making profits, as in panel (a), new firms have an incentive to enter the market. This entry increases the number of products from which customers can choose and, therefore, reduces the demand faced by each firm already in the market. In other words, profit encourages entry, and entry shifts the demand curves faced by the incumbent firms to the left. As the demand for incumbent firms' products falls, these firms experience declining profit. -Conversely, when firms are making losses, as in panel (b), firms in the market have an incentive to exit. As firms exit, customers have fewer products from which to choose. This decrease in the number of firms expands the demand faced by those firms that stay in the market. In other words, losses encourage exit, and exit shifts the demand curves of the remaining firms to the right. As the demand for the remaining firms' products rises, these firms experience rising profits (that is, declining losses).

Monopolistic Competition Attributes

-Many sellers: There are many firms competing for the same group of customers. -Product differentiation: Each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price taker, each firm faces a downward-sloping demand curve. -Free entry and exit: Firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero.

Differences between oligopoly and monopolistic competition

-With an Oligopoly there are only a few sellers in the market. The small number of sellers makes rigorous competition less likely and strategic interactions among them vitally important. - A monopolistically competitive market has many sellers, each of which is small compared to the market. It departs from the perfectly competitive ideal because each of the sellers offers a somewhat different product.

The long-run equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways:

1. Each firm in a monopolistically competitive market has excess capacity. That is, it chooses a quantity that puts it on the downward-sloping portion of the average-total-cost curve. 2. Each firm charges a price above marginal cost.

How do monopolies and monopolistic competition compare?

1. Firms are not price takers. 2. Price is above marginal cost.

More recently, economists have defended brand names as a useful way for consumers to ensure that the goods they buy are of high quality. There are two related arguments:

1. First, brand names provide consumers with information about quality when quality cannot be easily judged in advance of purchase. 2. Second, brand names give firms an incentive to maintain high quality because firms have a financial stake in maintaining the reputation of their brand names.

The four market structures examples: 1. Monopoly- 2. Oligopoly- 3. Monopolistic Competition- 4. Perfect Competition-

1. Tap Water, Cable TV 2. Tennis Balls 3. Novels, Movies 4. Wheat, Milk

To add to the above differences in long-run equilibrium:

1. The perfectly competitive firm produces at the efficient scale, where average total cost is minimized. By contrast, the monopolistically competitive firm produces at less than the efficient scale. 2. Price equals marginal cost under perfect competition, but price is above marginal cost under monopolistic competition.

Refer to Table 14-4. At what quantity does John's Vineyard maximize profits?

6

Monopolistic Competition

A market structure in which many firms sell products that are similar but not identical. Each firm has a monopoly over the product it makes, but many other firms make similar products that compete for the same customers. It chooses to produce the quantity at which marginal revenue equals marginal cost and then uses its demand curve to find the price at which it can sell that quantity.

Oligopoly

A market with only a few sellers, each offering a product that is similar or identical to the products offered by other sellers in the market.

total profit

A profit-maximizing, competitive firm will always hire an additional worker when the additional worker makes a positive contribution to

Refer to Figure 14-2. If the firm is in a short-run position where P < AVC, it is most likely to be on what segment of its supply curve?

AB

Refer to Figure 14-2. Which line segment best reflects the short-run supply curve for this firm?

ABCE

Critique of Advertising

Argues that firms advertise to manipulate people's tastes and that commercials are psychological rather than informational, e.g. showing a group of happy people on the beach drinking the product. Such a commercial is argued to create a desire that otherwise might not exist. Critics also argue that advertising impedes competition. Advertising often tries to convince consumers that products are more different than they truly are. This makes consumers less concerned with the price differences and as a result, markets become less competitive and the firm's demand curve becomes less elastic, which in turn helps firms to increase its profits by charging a larger markup over marginal cost.

The Defense of Advertising

Argues that firms use advertising to provide information to customers. This information allows customers to make better choices about what to buy and, thus, enhances the ability of markets to allocate resources efficiently. Defenders also argue that advertising fosters competition. Because advertising allows customers to be more fully informed about all the firms in the market, customers can more easily take advantage of price differences. Thus, each firm has less market power. In addition, advertising allows new firms to enter more easily because it gives entrants a means to attract customers from existing firms.

Refer to Figure 14-4. When market price is P2, a profit-maximizing firm's losses can be represented by the area

At a market price of P2 the firm has losses, but the reference points in the figure don't identify the losses.

A firm in a monopolistically competitive market chooses its quantity of production

By setting marginal revenue equal to marginal cost

Critics argue that brand names cause consumers to perceive differences that do not really exist.

Consumers' willingness to pay more for the brand-name good, these critics assert, is a form of irrationality fostered by advertising.

$20

Diane's Auto World installs tires on automobiles, light trucks, and sport utility vehicles. She is a profit-maximizing business owner whose firm operates in a competitive market. The marginal cost of installing a tire is $10. The marginal productivity of the last worker that Diane hired was 2 tires per hour. What is the maximum hourly wage that Diane was willing to pay the last worker hired?

Product-variety externality

Entry of a new firm conveys a positive externality on consumers because they get some consumer surplus from the introduction of a new product.

Business-stealing externality

Entry of a new firm imposes a negative externality on existing firms because this causes other firms to lose customers and profit.

Which of the following represents the firm's long-run condition for exiting a market?

Exit if P<ATC

Monopolistically competitive markets, like monopolies_______

Face a downward-sloping demand curve and, as a result, charge a price above marginal cost. Like monopolies, they also choose the quantity and price.

Competitive markets and monopolistically competitive markets compare in that there is ____________, ____________, and ___________; they differ in that ______________________

Free entry, many sellers, and zero profit in the long run; Monopolistic competition consists of differentiated products being sold and firms are not price takers, while perfect competition consists of identical products and P=MC.

rise

If the demand curve for beef shifts to the right, then the value of the marginal product of labor for butchers will

The monopolistically competitive firm follows a monopolist's rule for profit maximization

It chooses to produce the quantity at which marginal revenue equals marginal cost and then uses its demand curve to find the price at which it can sell that quantity.

productivity

MPL is the same thing as

change in Q/ change in L

MPL=

Competitive firms have no market power and, thus, must set price equal to marginal cost or else they will lose all their customers to other firms. Monopolistically competitive firms, on the other hand, have some market power, leading to a

Markup of price above marginal cost even in the long run

In recent years, the claim--made by by lawyers, doctors, and pharmacist--that advertising is "unprofessional" when done in those fields, has been

Met negatively by courts as they believe such claims were made to reduce competition. Thus, many of the laws that prohibit advertising by members of these professions have been overturned.

Monopolistic Competitors in the Short Run

Monopolistic competitors, like monopolists, maximize profit by producing the quantity at which marginal revenue equals marginal cost. At the quantity in which MR=MC, if price (represented by the demand curve) is above ATC, then the firm makes a profit. If price (represented by the demand curve) is below ATC at the quantity in which MR=MC, then the firm makes losses.

If the many firms sell differentiated products, the market is______________; If the many firms sell identical products, the market is

Monopolistically competitive; Perfectly competitive

If there is only one firm, the market is a ____________; If there are only a few firms, the market is a______________

Monopoly; Oligopoly

Refer to Table 14-1. Over what range of output is marginal revenue declining?

None, marginal revenue is constant

Because both good and bad cereals would be advertised, consumers could not infer the quality of a new cereal from the fact that it is advertised.

Over time, consumers would learn to ignore such cheap advertising, proving that advertising that contains little information about the actual product is still effective.

^^

P ^ what happens to VMPL?

goes down

P goes down what happens to VMPL?

Refer to Figure 14-4. Firms would be encouraged to enter this market for all prices that exceed

P3

Efficient Scale

The quantity that minimizes ATC. In the long run, perfectly competitive firms produce at the efficient scale, whereas monopolistically competitive firms produce below this level.

Competitive firms that earn a loss in the short run should

Shut down if P<AVC

A firm that knows that its product is good will______________, while a firm that knows its product is bad will_______________

Spend copious money on advertising, Spend very limited money, if any, on advertising

Markup

The amount added to the cost price of goods to cover overhead and profit.

The product differentiation inherent in monopolistic competition leads to:

The use of advertising and brand names.

is the firm's demand for labor

The value of the marginal product of labor

Defenders of advertising argue that even advertising that appears to contain little hard information may in fact tell consumers something about product quality.

The willingness of the firm to spend a large amount of money on advertising can itself be a signal to consumers about the quality of the product being offered.

How is the markup over marginal cost consistent with free entry and zero profit?

The zero-profit condition ensures only that price equals average total cost. It does not ensure that price equals marginal cost. For price to equal average total cost, price must be above marginal cost.

Monopolistic competition does not have all the desirable properties of perfect competition:

There is the standard deadweight loss of monopoly caused by the markup of price over marginal cost. In addition, the number of firms (and thus the variety of products) can be too large or too small. In practice, the ability of policymakers to correct these inefficiencies is limited.

decreases and the value of the marginal product of labor decreases

Typically, as a firm hires additional workers, the marginal product of labor

PxMPL

VMPL=

When calculating marginal cost, what must the firm know?

Variable Cost

Excess Capacity

What firms are said to have under monopolistic competition. n other words, a monopolistically competitive firm, unlike a perfectly competitive firm, could increase the quantity it produces and lower the average total cost of production. The firm forgoes this opportunity because it would need to cut its price to sell the additional output. It is more profitable for a monopolistic competitor to continue operating with excess capacity.

Imperfect Competition

What industries face between that of perfect competition and monopoly, e.g. oligopoly, monopolistic competition

Economists measure a market's domination by a small number of firms with a statistic called the concentration ratio,

Which is the percentage of total output in the market supplied by the four largest firms.

A monopolistically competitive firm sets P>MC,

Which means that P=ATC>MC in the long run. Since ATC is minimized when ATC=MC, the firm's average total cost in long-run equilibrium is greater than the minimum average total cost, and the quantity the firm produces in long-run equilibrium is less than the efficient scale.

A decrease in demand for the final product produced by labor

Which of the following events could decrease the demand for labor?

Refer to Scenario 14-2. To maximize its profit, the firm should

decrease its out put but continue to produce

VMPL

demand also equals

derived demand

derived from the demand in the product market

When a profit-maximizing firm in a competitive market has zero economic profit, accounting profit

is positive

Refer to Figure 14-1. When price rises from P3 to P4, the firm finds that

it can earn a positive profit by increasing production to Q4

Refer to Figure 14-1. When price falls from P3 to P1, the firm finds that

it should shut down immediately

In a competitive market, no single producer can influence the market price because

many other sellers are offering a product that is essentially identical

land, labor, capital

name the factors of production

wage growth

productivity is tied to

The intersection of a firm's marginal revenue and marginal cost curves determines the level of output at which

profit is maximized

Refer to Table 14-3. If the firm finds that its marginal cost is $11, it should

reduce production to increase profit

1. change in the taste/attitude for work-leisure 2. opportunities for workers in other labor markets 3. immigration

shifters of supply

-Price -productivity

shifters on the demand curve

When total revenue is less than variable costs, a firm in a competitive market will

shut down

When fixed costs are ignored because they are irrelevant to a business's production decision, they are called

sunk costs

capital

the equipment and structures used to produce goods and services

marginal product of labor

the increase in the amount of output form an additional unit of labor

factors of production

the inputs used to produce goods and services

The short-run supply curve for a firm in a perfectly competitive market is

the portion of its marginal cost curve that lies above its average variable cost

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

production function

the relationship between the quantity of inputs used to make a good and the quantity of output of that good

labor supply

trade-off between work and leisure, opportunity cost of leisure is the wage